Gold Caught With Its Backwardation Showing

With all the discussion on the Internet, some of it confusing, we thought a picture would be worth a thousand words.

Backwardation is when there is a profit to decarry the metal. This is the simultaneous sale of metal in the spot market and purchase of metal in the futures market. Selling is on the bid and buying is at the ask. So the spread one could earn is the decarry: Spot(bid) – Future(ask).

We normally quote this as an annualized percentage (the basis), but we thought we would show the raw numbers. This graph was made about 10:15am ET on March 4.

Sure enough, there is a 76-cent per ounce profit to be made decarrying gold. This is a small number compared to the price around $1600, and it could be easily missed. It is the actual profit one would make in the real market by this arbitrage (not including commissions and fees, which a bullion bank would not be paying).

It is fascinating that it persists. It’s been there for weeks! Does no one have gold to put towards this trade? Is there no attraction to a 0.3% annualized return on a risk-free trade maturing in less than 60 days?

Jim Sinclair is right when he says most people's balls will flat out be busted when gold is in the 4500-5000 range - the moves then will scare people into heart attacks and that will be for NORMAL trading.

I fully expect then to see 200/oz moves REGULARLY - up and down - and 800/oz moves for the manipulation & wall of worry scares.

I was noticing that filmflam (photographer by chance?). Silver did it several days ago and it keeps testing that line, while a rising longer term trend line has risen to meet it. Perhaps charts in a minipulated market mean nothing, but look at the churn in silver, at what appears to be a major inflection point:

the backwardation is even greater when talking substantial numbers of contracts where physical delivery is involved....lbma has frequently paid cash - and it was not optional - of substantial premiums to terminate physical delivery. it is not commonly known.

and the anecdotal reports about what is available on the street for itty bitty 1oz coins is nonsense. that is throw away. the comex is in the midst of its vanishing act. it will not be in the gold business within a couple of years due to the fraud....

the larger issue is that gold is in backwardation at all - a scenario which should never obtain...the fat lady is most definitely clearing her throat for her fiat aria....

You have to admire how the bastards operate. The stock market is rolling today to a new all time high, and gold/silver were up around 2% this morning as well. I guess they couldn't allow us to have one good day, so now the metals are getting slammed again nearly back to the day's starting level. DOW and SP roll, while metals take a hit again. None of this makes any sense, except for the theory that TPTB are trying to destroy PM morale.

Rest assured, I'm bullish the metals, as my name implies, but what other data point is there that people are leaning on to claim premiums are rising on physical, other than the fact that Silver Eagle premiums have popped a bit. The gouging that occurred when the mint ran out in December has completely disappered.

on top of the page, you will see spot Bid/ask price which is very close to comex

when you want to sell your 1 oz Gold American eagle coin ( random year ) you expect them to buy your coin at the bid price or closer to bid price right ?

No, look at the APMEX buy price at the bottom of the coin picture, its $40 above the spot bid price.. that means they are paying you 2.5% more than the spot price, this is same for at least couple months , its always +$40

American Gold Eagles have additional SILVER and COPPER added, kind of like the Krugerrands. So the dollar value of a "ONE OUNCE GOLD EAGLE" is actually more than the spot price of gold due to the additional metals.

Out here on the east coast of canuckland there is a $6 premium on an ounce of physical silver from the Only coin shop out here, though junk silver (dollars and 50 cent pieces are only 5% over spot )... Scotia Bank's premium is about a buck cheaper on the eounce.

You know you can order gold and silver from USA and it's tax free, right? I have ordered monster boxes from APMEX and never had a problem - just make sure that you are ordering "Bullion" (ie, .999 or .9999) products. Mixed metal coins such as the American Gold Eagle or Krugerrand ARE taxable.

Perhaps you have better suppliers than I do, but I have encountered better than a 15 percent increase in premiums from the start of the year... I recognize that that is anecdotal... Is your information better?

Say what you will about the present backwardation but I'm interpreting this differently.I believe it's the start of concern over the next phase of FED policy.The FED Chairman comes from humble roots.Look at his start in life.He is also a student of the Great Depression.He's following a very important playbook.Recently a number of Congressmen and Senators took issue with what the Chairman calls "his dual mandate."The Congress has given the FED the other mandate of targeting employment or unemployment,whichever way you want to look at the situation.Legislation has already been introduced to try to get rid of and change the dual mandate(get rid of the FED's responsibility to taget unemployment).That will be voted down most certainly by the Whitehouse.Don't forget one thing,the Chairman vowed not to forget the ordinary working people and has a specific point that he is looking for in the employment statistics.That's why QE will continue and interest rates will stay low,until the second mandate is fulfilled.Look at education for instance,community clleges that train tradespeople can't get the needed funding to train anybody.Where education in China is basically free if you qualify.IMO,the initial backwardation indicates greater risks reflected in China's housing bubble and in Europe's degrading economic situation with it bordering on depression.Top it off with uncertainty with sequester.Gold is a fear factor as well.If the housing bubble bursts in China,I predict an immediate rush into Gold and the U.S. Dollar and a drop in oil as the world economy slows even more.There has to be a final capitulation of all world bad debt caused by derivatives (ask Warren Buffet) and China's housing bubble might be the trigger for the needed washout.We'll see.Krugman,where are you hiding?

The argument goes... there is an appearance of backwardation when contracts are rolled over at the end of the month... but that this phenomenon in metals is occurring far enough out to imply that folks are losing confidence in delivery...

Well... there has been a steady increase in premium... Clearly there is greater interest in the physical market.

One explanation is that prices in physical are starting to dictate spot, while confidence is lost in the paper market... If this is the case it portends an uptrend in the metals... Possibly huge, as the physical market is a fraction the size of the paper market.

This imminent trend up is anticipated by many of the major players in metals. I am not entirely convinced only because I know that the forces at play to keep the metals surprised are huge... What is at stake is much of the world's imaginary paper wealth... Well, not imaginary so long as folks keep the faith... Metal prices effect that faith, as I am quite certain most of you know.

In any event, most of my wealth is intangible assets with intrinsic value... although I have a speculative position in the miners. I will win by sitting where I am at and watching... Sooner or later this thing will blow... Hmmm, need to be careful with that word... Blow as in an explosive effect... Some of you younger folks might get the wrong meaning...

There is no backwardation in the Gold Futures complex. the author reveals that he has the perfect credentials to be a Zero Hedge contributor; eg. he knows nothing. 15seconds looking at the list of futures settlement prices which are all on one convenient page at CME.com will tell you what the facts are; then you can skip the BS.

erm... he's not talking about backwardation in the futures. You reveal you have the perfect credentials to be, well nothing that requires English reading. Try looking at the articles before writing them off.

He is talking about Futures prices; there's nothing else to talk about; it's the only place where contango and backwardation occur or exist; and as I say; if you will stop typing for one minute and read the price quotes on the CME page; you will see what the facts are; there is no backwardation.

It's only in the delivery month, which the previous THREE PART SERIES on this topic managed to screw up.

It's a tiny amount, certainly less than the fees and bid/ask differential for a retail customer.

It's a function of counter party risk, but at least this shows the true pricing relationships.

A more interesting question for traders and the larger ZH Community is why option pricing on PMs and every other commodity has gone ballistic. With zero interest expense, options should be dirt cheap. They are not, which means that real volatility (scared shitless about the future) as opposed the the VIX, is at or near an all time high.

Many hold physical as insurance in case of a financial event that should disrupt currencies or paper markets. 0.3% for 60 days is 1.8% per annum additional insurance cost for physical versus paper. It's a real cost that shows a shift toward valuing physical.

Precisely. This number is the coefficient of people who understand the reality of being corzined divided by the number of people who do not understand the reality of being corzined. As you can see there are a very small number of people who do not accept "risk free" as being entirely without risk even when relative to a bullion bank as the counterparty.

What this tells me is that the vast majority of people do believe this is a risk-free trade yet they are not participants in this market. Of the number of participants in this market (in reference to the entire market - including non-participants) quite a large percentage of players view this as quite risky.

In summary, those who are close enough to tell that the attractive TBTF super model is indeed "a pig with lipstick" are not interested in becoming intimate, while the vast majority 99.7% have no idea what's headed their way and are the same people who bought that T-shirt that says "Either you love bacon or you're wrong" not realizing that they were staring into a mirror the entire time. They themselves are the answer to the proverbial question of "What's for dinner?" The answer would be ham.